Homexperts.lu tries to interpret these rising price statistics which contradict the experience on the field.
Let’s start with a brief historical review.
The whole of 2021 was marked by a sharp rise in prices, which was also felt as such by the professionals.
January and February 2022 were still very dynamic months, with a large number of transactions and a perceived continuation of the price increase.
But from the start of the war, i.e. at the end of February and during the course of March, a shock was felt very clearly by realtors: almost from one week to the next, demand fell sharply and purchasing decisions even more so.
After the shock of the war, the spectre of inflation and rising interest rates has further dampened the risk appetite of buyers, including investors, from July 2022 onwards.
But prices have not yet fallen, at least not significantly, until September.
So it was really from September 2022 onwards that estate agents felt a real problem in selling properties at the price levels known up to that point.
At first rather timidly. But as owners who had already bought (or built) a new home could no longer sell their current property, prices fell further and further.
The financial problems associated with the repayment of two loans (the one on the existing property and the bridging loan on the financing of the new acquisition) led many households to accept lower prices (sometimes up to -15 or -20%) as of Q4/2022.
This is logical and easily understood by 2 explanations.
Firstly, most households owned their old property for several years. So even by selling at -15% or -20% they still realised a nice capital gain compared to their purchase price.
Secondly, given the meteoric rise in interest rates, the financial burden of repaying two loans has become untenable for many “double owners”. It became therefore preferable to sell at a lower price, but still well above the purchase price, than to no longer be able to repay the monthly payments without having financial problems in the household.
So how do you reconcile the latest rising price statistics with falling market prices?
On the basis of the historical analysis above, it is quite easy if you take into account another very important factor: the time between the signing of the preliminary sales agreement and the notarised deed.
On average, from the signing of the sale agreement, it takes 6 to 8 weeks to get the bank’s agreement. Then it takes another month or so for the notarial deed. So between the agreement to sell, which determines the price via the sale agreement, and the notarial deed, 3 months generally pass.
This means that the deeds used for the statistics of last quarter of 2022 are largely based on the Sales agreements signed in the third quarter.
And we have seen above that in the third quarter of 2022 the number of transactions had already fallen sharply, but not yet the prices.
We can conclude from this that the real decrease in prices, observed on the market from the start of the school year 2022, will only start to appear in the statistics from the first quarter of 2023… which will be published in the summer.
There is a time lag of at least 6 months between the price fall observed by professionals on the market and the publication of the respective statistics.
But why then is there still an official increase of 5.6% in the last quarter?
This is also easily understandable, as the market was still strongly up until February 2022. As the official statistics compare one quarter with the same quarter of the previous year, this price increases up to the beginning of 2022 are still reflected in the sales agreements signed between June and September and completed in the last quarter of 2022, as prices had not yet fallen until the start of the school year.
This analysis is also supported by the fact that the prices recorded in the last quarter of 2022 are already almost 2% lower than the prices recorded in the previous quarter.
Where do we go from here? How Homexperts.lu sees the market evolving.
Without going into all the complexity of the market, we would like to point out two aspects that seem to us to be decisive.
1. The continued increase in the interest rates
The last two increases in the European Central Bank’s rates have not yet been passed on to Luxembourg clients. We must therefore expect a further increase in borrowing rates of at least 1%.
However, as the market is already extremely quiet now, one can imagine that it will fall even further.
2. Fewer “compulsory” sales
On the other hand, in the coming months there will be fewer households that will be forced to sell at reduced prices to get rid of two mortgages that are weighing down their finances. Why? Simply because from the start of the school year in 2022, they have taken less risk by buying a new home without having first sold their existing property.
As for investors, they have no interest in selling at a low market level anyway. We therefore believe that fewer sellers will be forced to accept further significant reductions in the future and conclude that prices will not further drop sharply. On the other hand, we believe that advertised prices will continue to fall, in order to come closer to final sales prices, which is often not yet the case.
Based on the above two analyses, we expect the following for the coming months:
– a very quiet market, marked by a historically low number of transactions
– without, however, a massive and generalised (with the emphasis on “massive and generalised”!) continuation of the fall in sales prices
– but still a fall in the prices posted.
On the other hand, in order to sell in such a calm market, it will be necessary to accept the new reality of prices which have been falling for the last 6 months, even if this is often not yet reflected in the listed prices.
What about bank margins?
Between March and December 2022, the ECB increased the key rate by 2.5% (we do not take into account the 2 increases, which have not yet been passed on to customers), while variable rates for mortgages generally increased by 3% (variations by bank are obviously possible).
That is to say that on average, for each 0.5% increase by the ECCB, the banks have added a margin of 0.2% (which amounts to 40% added to the increase in the key rate) whereas abroad these additional margins seem to be much lower.
While it is perfectly normal and understandable that banks have to make up for years of negative interest rates, let’s just hope that they are kind enough to pass on only one of the last two ECB rate hikes to their customers or at least not add any more margin.
So should you sell (respectively buy) or wait?
To answer this question, which many homeowners and buyers are asking themselves, we would like to share with you the feelings we have at Homexperts.lu.
In our opinion, the answer depends not only on the financial capacity of the individual but also on the personal situation.
If you want to sell your current property in order to buy a new, larger home, it is in your interest to sell, as it is highly likely that the reduction you will have to accept on your current (smaller) property will be proportionately smaller than the gain you will be able to make on the new (larger) acquisition. So in the end, you will probably win. However, if you want to sell and then become a tenant, this is not the right time and it is better to wait.
If you want to sell a variable rate financed investment property to reinvest in a new property, you may also come out ahead, as you will probably be able to find a better deal on the purchase than the reduction you are prepared to accept on your sale. On the other hand, if you don’t want to reinvest in property, this is probably not the best time to sell.
Finally, if you have inherited a property, you should consider whether you want to rent it out. If you do, it may require renovations, you may be left in joint ownership with other heirs, you may have to accept the risk of getting a bad tenant… If you don’t mind, it’s probably better to rent out the property for a while and sell in a few years. But if you don’t want to take on these disadvantages and risks and would rather have the cash flow quickly, it’s better to sell.
Whatever the situation, if you decide to sell, the key is to be well advised to determine a fair and realistic price, which allows you to move forward and avoid “burning” your property.